These companies produce a better return on shareholders' money than any others.
Company analysis isn't just about dividends and profits. It is also vital to measure a company's ability to turn cash into profits. Would you rather have your money in a company that needs £100m to make £10m, or a company that can turn the same profit with just £50m?
The Return On Equity (ROE) is one of the simplest and most popular measures of company profitability. It is simply the net profit that a company makes, divided by (total assets - total liabilities).
Like all fundamental measures, ROE is a basic statistical measure. It will never tell the full story and should only be used as part of more detailed investment research.
I've trawled the FTSE 100 (UKX) to find the companies with the highest Return on Equity.
|Company||Price (p)||ROE %||P/E (forecast)||Yield (forecast, %)||Market cap (£m)|
|Next (LSE: NXT)||3,595||336.9||13.0||2.8||5,886|
|British Sky Broadcasting (LSE: BSY)||738||91.6||13.2||3.8||12,200|
|Hargreaves Lansdown (LSE: HL)||748||78.5||25.8||3.4||3,550|
|BT (LSE: BT-A)||223||59.3||9.0||4.2||17,552|
|Petrofac (LSE: PFC)||1,613||56.3||13.9||2.4||5,581|
|Admiral (LSE: ADM)||1,158||56.3||12.9||7.3||3,149|
|Croda International (LSE: CRDA)||2,326||54.8||17.8||2.6||3,147|
|InterContinental Hotels (LSE: IHG)||1,595||41.9||17.8||2.5||4,343|
|Fresnillo (LSE: FRES)||1,903||40.0||28.7||1.8||13,647|
|British American Tobacco (LSE: BATS)||3,208||39.6||15.4||4.2||62,139|
Data from Stockopedia.
Four stood out in particular.
Next's large return on equity figure is a result of the company's very close match between assets and liabilities.
Despite troubles on the high street, shares in Next are up over 60% in the last two years.
Next has successfully diversified into online sales. At the time of the last half-year results, Next Directory (which includes online) reported a 13.3% rise in sales. By comparison, Next's bricks-and-mortar operations managed only a 0.2% increase.
Next has only failed to increase its dividend once since 1998. Analyst consensus is for another two years of double-digit dividend growth at the company. This puts Next on a 2014 yield of 3.1%.
As for profits, these are expected to continue increasing but at a slightly lower rate. Consensus is for a 9.9% rise in earnings per share (eps) in 2013, followed by 9.8% of growth in 2014.
The natural resources boom of the last 10 years has made some companies big winners. Petrofac is one of the companies that best demonstrates this.
The company builds and maintains the infrastructure that oil companies need to exploit resource discoveries. It is therefore a classic 'picks and shovels' investment; the company is not speculating on discovering riches, instead it is selling goods and services to the dozens of companies that are drilling.
Five years ago, Petrofac made $0.35 in eps. The shareholder dividend was $0.09 per share. Since then, both of these figures have increased year on year. For 2012, Petrofac is expected to make eps of $1.85. The dividend is expected to come in at $0.63.
Growth at Petrofac is expected to continue into 2013, putting the shares on a price-to-earnings (P/E) ratio of 12.3 times forecasts for the year.
If you are interested in exploring this 'picks and shovels' theme further then check out Weir Group (LSE: WEIR) and AMEC (LSE: AMEC).
3) InterContinental Hotels
InterContinental owns hotels spanning from budget (Holiday Inn) to luxury.
In an industry where margins are crucial, it is testament to IHG's management that they deliver such a high ROE.
As you would expect from a discretionary industry such as hotels, the recession was not kind to IHG shareholders. Between 2007 and 2009, the dividend was held at $0.45 per share. At the worst, the shares fell to less than a third of today's price.
IHG delivered encouraging interim results. Both occupancy and average room rates increased. A $1b return of capital was also announced. The market is expecting a 17.8% rise in dividends for the full year and a similar increase in eps.
This leaves the shares trading on a forward P/E of 17.8, falling to 16 times forecast earnings for 2014. The forecast dividend rises will take IHG close to a 3% yield for 2014. It would appear that the market is demanding investors pay up for shares in a quality operator.
4) Croda International
Croda is a speciality chemicals business. One of the company's biggest markets is the supply of chemicals to the beauty and personal care industries.
Croda has been one of the market's big success stories of the last five years. Since 2007, the shares are up 260%, propelling the company into the FTSE 100.
In the last five years, dividends at Croda have increased, on average, by 30.9% per annum. Remarkably, earnings have outstripped this: rising 39.5% a year on average in that time.
With its interims in July, the company reported an 8.1% increase in eps and earnings. This is in-line with the market's expectations for the full year.
Croda's success has been acknowledged by its high market rating. However, with an increasing number of people being prepared to spend on beauty products, it is not difficult to see the company's growth continuing. Perhaps one to take another look at, should a wider market setback occur.
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> David does not own shares in any of the above companies.